Until the invention of money, human economic activity was reciprocal. Reciprocal means if someone in a group obtains something from the environment or others, they must return something to the environment or another. This increased the survival chances of individuals in groups and was a successful strategy for humans compared to other similar species.
The invention of money allowed humans to measure contributions and obligations and increased economic activity. However, along the way, Capitalism broke the principle of Reciprocity because profits were rarely shared. Societies found ways of correcting the imbalances through taxing profits and redistributing the profits or introducing ideas such as frequent flyer points. Unfortunately, redistribution is expensive and challenging to get right.
Various strategies to avoid redistribution include mutual credit, cooperatives, cartels, and monopolies.
Free markets are another way to address the issue by reducing profits through competition, but they are expensive to operate and require significant costly regulation and oversight.
Reciprocal Capital or sharing of profits is another strategy. It operates like mutual credit by providing a lower-cost way to share profits across a group. Reciprocal Capital is that if I make a profit, I agree to share it with the person from whom I made the profit, providing they agree to share the profit they make from me.
Lower cost means less money is transferred to perform the same function. When money is used to reciprocate, the payments include the product cost and the profit. The product is exchanged for the cost of production, but there is no reciprocation by the seller of the profit. All the profit goes to the owner of the production, and the buyer receives nothing in return for providing the money to make the profit.
Reciprocal Capital implements Polanyi’s ideas in his 1943 book — The Great Transformation. Polanyi proposed the social alternative of sharing to the neo-liberal idea of markets setting the price of Capital. Unfortunately, the technology of the time made the approach difficult because the calculations and information flows were slow and expensive.
Reciprocal Loans
Reciprocal Loans use Economic Reciprocity to reduce the cost of loans without reducing lenders' profits and illustrate Reciprocal Capital's effectiveness. Economic Reciprocity speeds up the movement of investment Capital to allow a given amount of Capital to be invested more frequently. The new Capital shared from investment is immediately invested. If it is not shared immediately, it waits until the owner decides to invest or use it for consumption.
Let P be the amount lent, I the interest payment (or profit) per year, and R be the repayment.
In year one, R is repaid and subtracted from P, while I is added to P. At the end of year N.
P(N)=P(N-1) + I - R
The profit I is not shared. With a Reciprocal Loan, the formula is
P(N)=P(N-1) + I/2 - R
The profit I is shared. The only difference between the two equations is that I is changed to I/2.
Sharing the profit results in a lower cost to the borrower and about the same to the lender. Community sharing of profits results in a more efficient financial system.
The approach applies to all loans. Applied to housing, it results in lower-cost housing.
Reciprocal Housing Loans
Changing how loans are repaid is a bookkeeping change, and any lender and borrower could use the approach. It will save the borrower about one-third in fees and could be done immediately and retrospectively for any loan. It marginally increases the interest fees, and the agreement could agree to adjust loan repayments for CPI inflation.
A group of homeowners could form a buyer/seller company or cooperative and put their houses into the Company. Doing this will keep all the interest funds within the community, and members can use these funds to invest in the maintenance and other home costs. Members of the Company could work together to pay insurance and services, further reducing the cost of home ownership. The above assumes the buyers all have zero equity. As the equity changes, the size of the loans reduces, further reducing the cost of housing. When all houses are purchased, the fees to homeowners will be similar to body corporate fees and depend on the services offered.
Homeowners who wish to move houses or downsize in the future could put their home into a permanent local home market and continue to live in their home until they vacate it. The approach will accelerate and reduce the barriers to changing homes. Reducing the cost of housing will dramatically reduce the need for social security benefits and taxes to supply the benefits.
The approach will remove renting as it can apply to short-term rentals and first-home buyers, as no deposit is required. It can apply to hotels, aged care, or any other form of accommodation. It means people who occupy a dwelling have responsibility for the dwelling while they occupy it.
The reduced costs come from the more efficient use of money to exchange houses. The same principles apply to all Capital Assets, including Companies and Cooperatives.
